A Switch in San Francisco

By

Maura Webber Sadovi

Dec. 25, 2012 10:15 p.m. ET

Condominium markets are bouncing back in cities such as New York, San Francisco and Miami. But as a recent deal in San Francisco shows, the condo recovery can be uneven within these cities, with some locations doing much better than others.

ENLARGE

A stalled San Francisco condominium project will be converted into affordable rental housing.
Holliday Development

The recent deal involved a stalled 196-unit condominium development in the Bayview section of San Francisco, a gritty former industrial area. During the boom years, a venture of Goldman Sachs Group Inc. and Houston developer James Noteware launched the roughly $108 million project, believing they could sell units in the area for as much as $500,000 each.

But, like many other projects that tried to push the frontiers of upscale living, the development ran into trouble when the financial crisis hit. Now, a new owner has stepped in with a less-ambitious plan.

L+M Development Partners, of New York, in November bought the unfinished project for $29 million and is planning to convert it into affordable rental housing. That means L&M will limit rents so they are affordable to low- and moderate-income families, or between $1,100 to $1,335 a month for a two-bedroom unit.

L+M, which specializes in affordable housing, plans to complete the project, named Candlestick Heights because it is near Candlestick Park, home of the San Francisco 49ers football team. The developer is financing the purchase and construction with equity raised through the sale of tax credits and from debt raised through the sale of tax-exempt bonds.

"If you want to wait for the condo cycle to come back in that location you might be waiting a few more years," said Olson Lee, director of the Mayor's Office of Housing in San Francisco. "We wanted to eliminate the eyesore."

Condo developments throughout the country got clobbered during the housing crisis. But in the past year, condo prices have been rebounding in many areas along with the rest of the housing market.

In San Francisco, condo prices rose 28% to $690,000 in the 12 months that ended in October from the same period a year earlier, according to Marcus & Millichap. On average, condo prices nationally rose 12% to $180,000 during the same period.

But condo prices are still off their peak levels. The record nationally was hit in 2006, with an average of $230,000, and in San Francisco the high was an average of $720,000 in 2007.

The decline in prices has been problematic for some developers that broke ground at the peak of the boom, especially those building in less-than-prosperous areas.

For decades the Bayview neighborhood was home to many people who worked at the Hunters Point shipyard. But since the shipyard's closing in 1974, the area has struggled.

In 2006, Goldman Sachs's Urban Investment Group, which helps the firm meet its requirements under the Community Reinvestment Act, and Mr. Noteware purchased the property for about $18 million and got a $90 million construction loan on the 196-unit project from Citigroup. But after the recession hit, construction stalled and the Goldman venture was unable to pay off the loan.

Citigroup took control in about 2009 and hired a local developer, Rick Holliday, to finish the project. Mr. Holliday completed 66 units but advised Citigroup to consider converting it to apartments because of the shaky condo market in the area.

There was a loss on the deal for Goldman, according to people familiar with the project. But a spokeswoman for the firm says that it was pleased with the outcome because it provides "affordable housing for the area."

The deal marks the first California project for L+M, which has worked with both Citigroup and Goldman Sachs in the past. Co-founded by Ron Moelis in 1984, the firm has in its portfolio about 8,000 affordable-housing units, largely in the New York region. Mr. Moelis said he was attracted to San Francisco because the overall housing market is healthy and the city is supportive of affordable housing.

L+M is financing the purchase and the construction partly with the sale of $50 million in affordable-housing tax credits to Wells Fargo & Co. The city of San Francisco also issued about $69 million in tax-exempt bonds backed by the project.

Mr. Moelis expects to complete the rest of the apartments in early 2014. As part of the project, the neighborhood also will get a long-promised park on a nearby lot that had become a dumping ground.In return, L+M will get a fee for managing the project and will own the property. The firm didn't have to invest any of its own money, but rents will be regulated.

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